Economics of Public Health 4

15 February 2012

Operationalising opportunity cost and marginal analysis for public health

In this blog, three things will be done. We will, first, summarise what the economic approach outlined in the last posting adds to more common methods of resource allocation in health. Second, we will critique the economic approach to needs assessment in terms of what has been achieved and its current limitations, especially from a public health perspective, before moving, thirdly, to two suggestions for how the economic approach can be improved.


How are resources currently allocated?

Of course, in many health care systems, quite sophisticated formulae are used to allocate resources across geographically-defined health care entities, such as primary care trusts in England. However, within such entities, the most common resource-allocation method is ‘history’; what you had last year plus a little bit more. Questions are rarely asked about how this money is used never mind whether to maximum effect. Unsurprisingly, the main approach to dealing with budgetary downturns is equally unsophisticated – that of across-the-board cuts. At best this might be seen as fair, with every part of the organisation ‘doing their bit’ by scaling back spending by some fixed percentage amount. However, it almost certainly ensures that what is left is not used to maximum effect. 

More sophisticated approaches to deal with budget contractions are now in vogue. Lean thinking and service redesign feature prominently in NHS Evidence and NHS Institute for Innovation & Improvement websites. The basic idea is to improve pathways of care to deliver the same (or better) outcomes at less cost – which, it is important to note, matches question four (covering technical efficiency) in the five questions posed in our economics approach to needs assessment. This would, of course, be the logical starting point for any ‘rational disinvestment’ process – pain-free resource release. However, with the prospect of looking for major budget reductions in the NHS and other public sector budgets in coming years, will they be sufficient? Our wider economics approach provides a broader framework within which lean and service redesign can fit. This takes us back to the five questions listed in the previous blog and repeated here.

An economic approach to needs assessment (five questions)

Blog 4 table 1 take 3


Can we do it?

Instinctively, one may think that there are several barriers to implementation of such a different way of thinking. Some of the main ones are listed in the box below, with a response to each. Additionally, there are many examples of health care organisations of different sizes using marginal analysis to guide resource allocation decisions. Over 70 health organisations worldwide had used the above framework by 2000, with use sustained in many. So, it has been done. A reference to this review of the literature is available from the authors, as is that on the best example of the use of rational disinvestment in the context of financial downturn; that of Calgary Health Region (Canada). Calgary was facing a CAD$42 million deficit in 2002-03 and the Provincial Government of Alberta (funder for this health authority) refused to ‘bail them out’. Instead of an across-the-board budget cut, rational disinvestment was used, whereby ‘cuts’ were made on the basis of least amount of benefit lost. The result was not only deficit elimination but also the implementation of new investments in programmes, as those were found to provide greater benefits than the lost benefits from cutbacks beyond the required CAD$42 million. This has since been replicated in other Canadian provinces. In England, in recent years, programme budgeting has become well established and was actively promoted within the World Class Commissioning framework to aid investment and disinvestment decisions. Thus, the principles of opportunity cost and marginal analysis have been embraced, but we need to go much further in this and also in continuing to develop the methods in ways that fit the organisations and populations we serve.

Barriers to the economic approach 

Health economics blog 4 table 2 take 2

Two potential improvements: portfolio approach and MCDA

Despite saying ‘we can do it’, there are two important ways in which the economics approach to needs assessment could be improved and which are important for population health interventions. Both of these relate to the fact that the outcomes of such interventions are difficult to demonstrate, at least in the short term, but they have been applied in prioritising public health interventions in Australia and in England. The first potential innovation is to adopt the idea of portfolio theory from the world of financial investment, whereby investors will allocate, as part of a portfolio, some level of their budget to ‘high-risk’ ventures for which there may be little certainty as regards success, but for which the pay-offs would be high if such success is achieved. In priority setting with respect to allocating resources to health interventions, it might be that we could equate many upstream population health interventions to ‘high risk’ ventures, and work from there to assess what levels of intervention in such ventures decision makers would be comfortable with. The second concept is that of multi-criteria decision analysis (MCDA) as a framework for organising information for making choices. Part of the process for MCDA involves defining a range of outcomes, placing weights on their relative importance, and, where data are not available on the extent to which such outcomes have been achieved by the various interventions being assessed, to devise some sort of scoring mechanism instead. When scored and weighted outcomes have been combined with cost data, the interventions can be ranked in terms of benefit achieved for resources expended, with options nearer the top of the list receiving priority. Of course, such systems are not perfect, but the scoring and weighting systems can be ‘played with’ to examine how sensitive the final ranking would be to different values. Furthermore, such rankings merely serve to inform a discussion about what the final set of priorities should be. The important factor is that the process is explicit and, hopefully, is better than having no process at all. We will go into MCDA in more depth in a later blog.

It would be good to know if people have experiences (good or bad) of using the above approaches, and, going further back in this posting: is there scope for the more rational economics approach to needs assessment? What do people think of the barriers and have you experience of overcoming any of them? Are there other ways in which we can embrace opportunity cost in practice?


Cam Donaldson

Kenny Lawson

Helen Mason

Emma McIntosh


About the author

Prof Cam Donaldson NIHR Senior Investigator and Yunus Chair in Social Business & Health


Cam Donaldson holds the Yunus Chair in Social Business & Health at Glasgow Caledonian University. He has worked as an academic health economist for nearly 30 years, mainly on development and implementation of methods of economic evaluation of health interventions.

Read all articles by Prof Cam Donaldson

Comments (2)

  • Alan Shiell replied on Wed 07 Mar 2012 at 12:28AM:

    When does marginal analysis fail?

    Consider this public health example. There are two geographically distinct communities each the same in all respects other than location and each at risk of some common infectious disease (measles will do). To be really effective we need to vaccinate more than 90% of the population. Herd immunity then kicks in. We can only afford to vaccinate the equivalent of one community. Traditional marginal analysis would suggest splitting the resources equally - the marginal benefits are the same, but the intervention is equally ineffective as the residual pool of infection continues to reinfect people. Non-marginal analysis would suggest putting all of the resources into one community. Then we hit the threshold, herd immunity kicks in and we gain a larger overall population effect.

    Other threats to public health such as poor diet, inactivity and tobacco use are similarly 'communicable' ... they spread to some extent at least through social networks. The mode of transmission is very different. For infectious disease one fleeting contact is enough. For social diseases contact needs to be frequent, persistent and close.

    But despite this difference - might there be similar implications for how we allocate resources?

  • Response from Cam, Kenny, Helen and Emma replied on Tue 13 Mar 2012 at 02:43PM:

    Alan raises great examples of how the theory might not fit the practice. So, how to respond.

    Well, first, the theory or marginal analysis was outlined in the way we did simply to illustrate a different way of thinking, one that we think still adds value.

    Second, of course we accept that the world is not continuous, but often is ‘lumpy’ in the way that Alan describes the vaccination and other ‘communicable’ options described.

    The key, we think is to take this in to account and define the options sensibly. This may then mean that it will often be the case that the ’margin’ is not actually that small.

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